19 October 2000

Havoc in world oil markets Prices good for oil states but signal global recession

By Ghassan Joha Star Staff Writer

OIL PRICES worldwide fluctuated violently over the past month. The prices were affected by the acceleration of political developments in the Middle East with respect to Al Aqsa Intifada and Iraqi threats of cutting oil supply to world markets.

According to press reports, oil prices hit $37-38 a barrel on Monday. Analysts speculate that these prices will decrease only if the Palestinian uprising stops and Iraq reverses its threats to cut oil production. The prices have actually decreased below $31 a barrel after the end of Sharm Al Sheikh summit.

However, oil prices maintained an upward trend in world markets in the past week despite assurances from Saudi Arabia that it would not cut its oil supplies in retaliation for US support to Israeli aggressions. Oil ministers in the Arab Gulf states decided to wait and examine the economic and political developments in the region, before taking an ominous decision on whether to increase oil out-put.

"Oil is no longer an Arab political weapon as it was in 1973. Therefore, I see no link between the current high oil prices and any new political developments in the Middle East," Dr Mamdouh Salameh, an international oil expert and director of Oil Market Consultancy Service in the UK, told The Star.

Salameh added that most of the Gulf states are more vulnerable to US pressure than other members of the Organization of Petroleum Exporting Countries (OPEC), including Iraq, Iran and Venezuela. The rise in oil prices is forcing the US president to use American oil reserves to cover part of US oil needs.

Robert Samuelson, economic analyst for the International Herald Tribune, wrote last week that Clinton's decision to use US oil reserves is politically-manipulated. He stated that Clinton is trying to play down oil prices and rekindle popular support.

Also last week, official statistics showed there was only a slow increase in Europe's and America's GDP at 0.5 percent and 0.3 percent, respectively.

Stock markets in the US and other countries also received a sharp blow because of the Iraqi threats and rapid escalation of tensions. The Dow Jones Index and NASDAQ fell sharply on Friday, 13 October.

Economists, meanwhile, expressed their concern over Jordan's interests vis-a-vis implications of the rising oil prices in world markets. Jordan has preferential prices from Iraq for oil supply all year round.

Being a non-oil economy, Jordan's imports of oil products come from Iraq. The Kingdom's oil import bill so far this year has amounted to about $600 million. Today, Jordan imports about 100,000 barrels per day of crude oil and petroleum products.

"Jordan's oil import bill imposes a heavy burden on the national economy," Salameh said. "Unfortunately, Jordan cannot shield itself against high oil prices even if Iraq continues to offer its preferential prices."

Salameh, who also works as a consultant for the World Bank and a technical advisor for the UN Industrial Development Organization in Vienna, pointed to Jordan's ability to create an American-style Strategic Petroleum Reserve (SPR) to cover the Kingdom's oil needs for the next six months.

"Jordan can build up its own SPR through buying crude oil when the price goes down." Salameh said Jordan must also proceed without delay with the project of extracting oil from its vast reserves of shale.

He said, however, that the current high oil prices strengthened Iraq's oil and political position, pointing out that if Iraq cuts its oil production from the current 3.2 million barrels per day (mbd), oil prices would certainly hit the $40-mark.

Turkey, meanwhile, came into the spotlight last weekend when it announced its readiness to resume pumping at full capacity on the Iraqi-Turkish pipeline. Economists, however, saw in the announcement a political maneuver by Turkey to influence the US congress to oppose the vote in their lower house on a resolution recognizing the killings of Armenians in 1915 as genocide. Iraq currently imports limited oil supplies through the pipeline only to buy food and medicines for the Iraqi people.

But news reports suggest Iraq is not in a position to increase its oil production due to shortage of spare parts and equipment required to upgrade the pipeline. These equipments are expected to be available only by mid-2001.

Turkey often complained that it has lost more than $30 billion in trade with Iraq since the UN sanctions were imposed in August 1990.

"I do not think Iraq will cut its oil production. It may, instead, use its threats to persuade the US to compromise on permitting foreign investment in Iraq's oil industry," Salameh explained.

He added that high oil prices would allow the Arab Gulf producers to balance their budget deficits through increased revenues. "Each $1 rise in the oil price adds another $3.1 billion to Saudi coffers at current production levels."

However, Salameh said, "it is not in OPEC's interest to let the price rise to $40 per barrel, as this may adversely affect the global economy and therefore lead to a reduction in global demand for oil," pointing to the rumor that the US is a member of OPEC by proxy, courtesy of Saudi Arabia and Kuwait.

According to Salameh, Saudi Arabia and Kuwait will earn this year $27.3 billion and $19.2 billion respectively from oil production. The overall revenues for the five Arab Gulf oil producers (Saudi Arabia, Iraq, Kuwait, United Arab Emirates and Qatar) are estimated for this year at $134.4 billion.

Asked if the current high oil prices would benefit Arab oil producers politically, Salameh replied that "the 1991 Gulf War and the current US-led New World Order have invalidated the practice of oil producers using oil as a weapon against the US and Israeli interests. An Arab world armed with nuclear capability and vast reserves of oil could have its voice heard internationally, as does Israel."

http://star.arabia.com/001019/JO1.html

-- Martin Thompson (mthom1927@aol.com), October 22, 2000